Tag Archives: Leisure & Tourism

article 3 months old

Is Wotif Now Cheap Or Too Expensive Still?

By Chris Shaw

Online travel and accommodation group Wotif.com ((WTF)) held its annual general meeting yesterday and at the meeting offered an update on trading performance so far in FY11. The update suggests trading has to date been challenging, particularly given the cycling of strong growth delivered in the first half of last year.

As Credit Suisse notes, net profit after tax growth in the first half of 2010 was 34%, reflecting the impact of fiscal stimulus measures, a weak Australian dollar and a pick-up in domestic travel.

The first two factors are no longer in play, while the broker notes current discounting of room inventory is impacting on Wotif's performance at present. Also playing a role is the stronger Australian dollar, which is making overseas rather than domestic travel more attractive.

Earnings guidance for the first half of FY11 is for a result broadly in line with the June half of FY10. This implies a profit of around $25.4 million, which would be 10% below the previous corresponding period and 2.5% below Credit Suisse's previous forecasts. The broker has adjusted its earnings estimates accordingly.

Credit Suisse remains bullish on the outlook beyond the current half year, taking the view the second half of FY11 should see a return to something closer to normal trend rates of growth as some of the existing cyclical headwinds roll off.

UBS agrees the second half of FY11 should deliver stronger performance, reflecting an expectation room rates continue to improve. This sees UBS lift its earnings estimates slightly through FY13, supported by an expectation of growth via acquisitions, particularly in Asia and India.

This contrasts with the view of Deutsche Bank, which is while short-term revenue pressures are coming from factors such as cheap airfares and a stronger Australian dollar, a longer-term issue of increased competition is also emerging. This is likely to put pressures on marketing spend, Deutsche suggesting Wotif is likely to have to pay more in order to win its share of business.

In contrast to UBS, Deutsche Bank has reacted to AGM guidance by trimming its earnings estimates in both FY11 and FY12 by 3%. In earnings per share (EPS) terms Deutsche is now forecasting 25c for FY11 and 29c for FY12, which compares to consensus EPS forecasts according to the FNArena database of 25.7c and 29.7c respectively.

BA Merrill Lynch agrees with the Deutsche Bank concerns on revenue and competition pressures, suggesting increased spending associated with a new marketing campaign has the potential to become a constant contributor to an increase in business capex in a more competitive environment.

This creates a valuation issue, which is causing brokers to have differing views on the investment merits of Wotif.com at current levels. For Credit Suisse, the expectation of improved performance beyond the current half year suggests value.

This is especially the case when FY12 earnings are considered, as on Credit Suisse's numbers Wotif.com is trading on a less than 15 times earnings multiple for that year, which is a near-record low. Given recent share price weakness, Credit Suisse has upgraded to an Outperform rating on valuation grounds.

BA-ML has an opposite view, arguing there is currently a growth and valuation mismatch in the Wotif share price. BA-ML notes the earnings guidance offered at the AGM implies Wotif.com is trading on an 18 times earnings multiple in FY11, falling to just 16 times in FY12 on the broker's estimates.

This puts Wotif.com in a price to earnings growth ratio of 1.2 times, which compares to a peer average of 1.0. This premium cannot be justified in BA-ML's view, so its Underperform rating is retained. Last week Macquarie made a similar argument in downgrading Wotif to a Neutral rating, suggesting tough earnings headwinds are increasing the pressure on what is a high earnings multiple stock at current levels.

Overall the FNArena database shows Wotif is rated as Buy twice, Hold five times and Sell once. The consensus share price target according to the database is $4.87.

Shares in Wotif.com today are stronger and as at 1.30pm the stock was up 19c at $4.79. Over the past year the stock has traded in a range of $4.07 to $8.08 and at current levels there is implied upside to the consensus price target according to the FNArena database of a little more than 4.0%.

article 3 months old

New Research Initiations On ASX-Listed Companies

By Chris Shaw

The week has started off as a busy one for new coverage of companies listed on the Australian stockmarket, with both Credit Suisse and Morgan Stanley adding some companies to their respective coverage universes today.

For Credit Suisse it is online travel group Webjet ((WEB)), the broker initiating with an Outperform rating and $3.20 price target. The attraction for the broker is Webjet has turned first mover advantage into a dominant and defendable market position, one Credit Suisse suggests is unlikely to be seriously challenged anytime soon.

This is because the business model and fee structure appears sustainable, Credit Suisse taking the view Webjet can continue to offer clients a lower total transaction cost than any of its competitors. This should ensure Webjet continues to secure at least its share of further growth as the Australian travel market continues to shift to online bookings.

Other potential boosts to growth in Credit Suisse's view will come from Webjet's expansion into the US market, the success of the company's iPhone application and a new relationship put in place with American Express.

Credit Suisse is forecasting earnings per share (EPS) for Webjet of 17c this year, 21.1c in FY12 and 25.8c in FY13, which compares to consensus EPS forecasts according to the FNArena database of 16c in FY11 and 18.4c in FY12.

On Credit Suisse's numbers this prices the stock on an earnings multiple of 9.2 times in FY12, which is a 20% discount to the Small Industrials index. The broker also estimates Webjet is trading on a 17-50% discount to comparable Australian internet stocks, while offering a forecast dividend yield of 6.4% in FY12.

Credit Suisse's target on the stock of $3.20 compares to a consensus price target according to the FNArena database of $2.59. BA Merrill Lynch and UBS rate the stock as Neutral with respective targets of $2.26 and $2.20, while RBS Australia agrees with Credit Suisse that Webjet is a Buy, but only has a target of $2.70.

Across at Morgan Stanley there have been three initiations, these covering Ausdrill ((ASL)), Emeco Holdings ((EHL)) and Tox Free Solutions ((TOX)). All have been rated as Overweight, within an In-Line view on the Australian emerging companies sector.

For Ausdrill, the attraction for Morgan Stanley is earnings leverage potential from the company's established industry position in both Australia and Africa. Ausdrill already has an established relationship with major mining companies in both markets, while Morgan Stanley sees scope for new contracts to add significantly to growth going forward.

As evidence of this, Morgan Stanley expects both revenues and earnings will increase by more than 50% between now and FY13. This leaves the broker above consensus with respect to its earnings forecasts beyond FY11. Morgan Stanley has a price target on Ausdrill of $3.00, while none of the eight brokers in the FNArena database cover Ausdrill.

New strategy should help Emeco deliver upside, according to Morgan Stanley, as the broker expects a reconfiguration of the hire fleet to larger, higher return equipment should deliver an expansion of returns.

As capital is recycled Morgan Stanley expects Emeco will put more funds into higher return assets, while capital management initiatives are also possible. Either way there should be a benefit for shareholders.

Morgan Stanley's forecasts call for earnings growth of 40% in FY11 and double-digit growth in each of the following two years. This sees the broker set a price target of $1.10, which compares to a consensus target according to the FNArena database of $0.90. The database shows Emeco is rated as Buy three times and Hold twice.

Waste management group Tox Free Solutions has also received an Overweight rating from Morgan Stanley, the broker seeing the company as a beneficiary of increased resource activity in Western Australia in particular. Recently won contracts support the expectation of a strong FY11, while there remains scope for further upside form additional contract wins.

The other attraction of Tox Free Solutions according to Morgan Stanley is the company offers a relatively defensive exposure to the resources sector given high barriers to entry and the complete waste management offering the company has created.

On Morgan Stanley's numbers, Tox Free Solutions should generate earnings growth of better than 20% per annum through FY13, this without any additional contract wins being priced into forecasts. Consensus EPS forecasts according to the FNArena database stand at 15.4c in FY11 and 18.2c in FY12.

Morgan Stanley has a $2.80 price target on the stock, which compares to a consensus price target according to the FNArena database of $2.38. The database shows Tox Free Solutions is rated as Buy twice and Underperform once, with targets ranging from $2.00 for JP Morgan to $2.65 for UBS.

There has also been one cessation of coverage today, with Macquarie announcing the removal of iSoft ((ISF)) from its coverage universe. The move follows the broker's appointment of a new healthcare team, the decision being to remove iSoft given a low market capitalisation and little interest from institutional investors.

Deutsche Bank is the only broker in the FNArena database continuing to cover iSoft, rating the stock as a Sell with a price target of $0.10.

article 3 months old

Australian Tourism In A Downturn

By Chris Shaw

The Australian tourism sector has been doing it tougher of late and a stronger Australian dollar suggests this trend is set to continue, reports CommSec chief economist Craig James. The Aussie dollar hit near 21-year highs against the euro this week and also moved back above US93c.

James notes Australia's tourism deficit, which is the excess of departures over arrivals, is now at record highs with more than a million more Australians travelling overseas in the past year than foreign visitors coming to Australia. This compares to an opposite situation nine years ago, when almost 1.5 million more foreign tourists visited Australia than there were Australians travelling overseas.

This deficit is poised to move even higher in coming months in James's view as the stronger Australian dollar makes it less attractive for foreign visitors to come to Australia. The data highlight this trend, as while tourist arrivals are up 9% from the depressed levels of a year ago, they are still 4.5% lower than the level of two years ago.

Any downturn in tourism has implications for the Australian economy, as James notes tourism directly accounts for almost half a million jobs and about 5% of total employment. Most vulnerable to the stronger Australian dollar impacting on tourism is regional Australia, as many tourism jobs are in regions such as northern New South Wales, North Queensland, Tasmania and the Northern Territory.

Tourism's impact on the Australian economy is significant, James noting the Australian Bureau of Statistics estimated the value of internal tourism consumption in 2008/09 was $92 billion. Of this, domestic tourism contributed $68.5 billion and international tourism $23.5 billion.

In terms of the overall economy, tourism GDP fell 0.4% in 2008/09, which compares to a 6.0% nominal lift in the broader economy. This means tourism's share of the Australian economy overall declined in 2008/09 to 2.6% from 2.8% previously.

One way to gauge how large the impact of a slump in tourism is for regional Australia, reports James, is to look at passenger numbers on key air routes. Here, Bureau of Infrastructure, Transport and Regional Economics (BITRE) figures show for the year to June 2010 a total of 51.76 million passengers were carried on routes averaging more than 8,000 passengers a month and with two or more airlines operating in competition.

The busiest route of Melbourne-Sydney reported a 12.2% increase in passenger numbers in FY10, while Adelaide-Sydney reported an increase of 10.9%. But tourism routes were down sharply over the same period, BITRE data showing the Cairns-Melbourne route experienced a 16.4% fall in passenger numbers and Sunshine Coast-Sydney a 15.5% fall.

James sees some implications for investors from a continuation of the weakening tourism trend in Australia. Those sectors most at risk according to James are the food and accommodation suppliers, as well as transport and tour operators.

James also notes there are knock-on effects of any downturn in these sectors, as higher unemployment in the broader tourist-dependent communities is likely to flow through to negative impacts on the retail, housing and other service businesses in such economies.

There is a more general impact as well, as James points out a stronger Australian dollar acts to depress economic activity, though it also acts to keep inflationary pressures at bay. For those regions most affected by a downturn in tourism James suggests State and Federal governments may need to introduce some economic assistance grants or programs to offset the lack of tourism dollars being spent.

From a listed stock perspective, CommSec rates Virgin Blue ((VBA)) as a Hold at current levels, as the group's core business remains weak given its emphasis on the leisure end of the Australian airline market.

The FNArena database shows Virgin Blue is rated as Buy three times and Hold five times, with an average price target of $0.44. Shares in Virgin Blue today are up 1c at 39c as at 1.30pm.

article 3 months old

Flight Centre’s All Cashed Up

By Chris Shaw

Travel group Flight Centre ((FLT)) delivered a result at the upper end of its guidance range, net profit for the year coming in 47% higher than in FY09 at $140 million. Along with the solid result came solid guidance, management indicating earnings in FY11 should be 10-20% higher than was achieved in FY10.

This should be achievable according to BA Merrill Lynch as momentum for Flight Centre is currently positive. The second half of FY10 saw better than expected performance with respect to revenues in particular, while margins were also solid at 14% and these are seen as sustainable.

A more stable outlook as indicated by management is a clear positive with respect to achieving FY11 earnings guidance, though JP Morgan adds a note of caution in pointing out the Australian consumer environment is not particularly favourable at present.

JP Morgan also points out FY10 saw a catching up on a lot of travel that had been deferred from the previous year. With ticket prices rising there is likely to be some impact on demand, which supports a more cautious view according to the broker.

Macquarie agrees Flight Centre benefited from a rebound in travel markets generally, while growth in wholesale products and lower prices on fixed margin contracts were a positive for the margin result. Earnings were also boosted by a significant reduction in losses in the US business.

This may prove to be significant going forward, Macquarie taking the view the US operations should be profitable in FY11. As such these operations have the potential to become a material driver of earnings for Flight Centre in future years.

In FY10 Flight Centre also significantly improved its cash flow performance, moving from an outflow of $12.5 million last year to positive cash flow of $243 million in FY10. Macquarie notes this has strengthened the balance sheet as net cash has risen to $144.3 million as at the end of FY10 from $33.4 million at the end of FY09.

On the back of the result and given the positive earnings guidance offered by management, earnings forecasts for Flight Centre have been lifted across the market. As an example, JP Morgan's numbers have been increased by 8% in FY11 and by 10% in FY12, the broker now forecasting earnings per share (EPS) of 161.1c and 176.3c respectively.

BA Merrill Lynch has lifted its EPS estimates by 10% in both years to 164c and 184c respectively, while Macquarie has increased its numbers by 5% and 3% to EPS of 157.9c in FY11 and 174.9c in FY12. Consensus EPS forecasts according to the FNArena database now stand at 158.1c and 173.5c respectively.

There is also dividend upside in coming years as JP Morgan notes the FY10 dividend of 70c represents a payout ratio of 50% of earnings. Flight Centre's policy is to pay out 50-60% of earnings in the form of dividends, so JP Morgan is forecasting dividends to increase to 81c in FY11 and 93c in FY12. This implies a net yield in FY12 of 4.9%.

UBS is also positive on the potential for capital management initiatives to be introduced, particularly given Flight Centre's net cash position, the return to strong cash flow generation and a franking balance of $134 million. If no initiatives are introduced, the broker expects an increase in the dividend payout ratio.

The Flight Centre profit result has not spurred any changes in ratings, the FNArena database showing the stock is rated as Buy five times and Hold three times. Macquarie and JP Morgan both retain their Hold ratings, arguing there is enough risk with respect to the earnings outlook that the share price represents full value around current levels.

RBS Australia doesn't agree, taking the view the 10-20% earnings growth expected this year and the potential for further solid growth in later years makes the shares good buying at current levels. BA Merrill Lynch agrees, noting Flight Centre is currently trading on a FY11 multiple of 11.6 times its forecasts.

This is 15% below the stock's mid-cycle earnings multiple and is 4% below the average multiple for the consumer discretionary sector. This is enough value for BA Merrill Lynch to retain its Buy rating.

Respective price targets have increased on the back of the upgrades to earnings forecasts, the database showing an average target now of $22.72 compared to $21.77 prior to the result. Shares in Flight Centre today are slightly weaker and as at 1.20pm the stock was down 14c at $18.86.

This compares to a trading range over the past 12 months of $12.68 to $21.43 and implies upside of around 21% to the average price target according to the FNArena database.

article 3 months old

Previewing FY10 Results And FY11 Outlook

By Greg Peel

Cash is king, says RBS Australia. The analysts recognise this line is a cliché, but in such uncertain times they suggest the “quality” of earnings results is just as important as the quantity. Quality is obviously a subjective measurement, but RBS believes quality can be quantified at least in part by a calculation known as a “cash realisation ratio”.

The analysts want to deploy CRR measurements given cashflow generation is a “unifying force” among companies that cuts through the noise of factors within company reports including one-off items, provisions, seasonal earnings bias and so forth. The CRR is measured as normalised profit after tax (NPAT) plus depreciation and amortisation divided by operating cashflow. It represents the “cash backing” of earnings and thus their quality, RBS suggests.

RBS has applied CRRs to its FY10 forecasts for stocks in the ASX 100 and will recalculate once all reports are in.

The top ten stocks on a CRR basis are Australian Worldwide ((AWE)), Oil Search ((OSH)), United Group ((UGL)), OZ Minerals ((OZL)), OneSteel ((OST)), Goodman Fielder ((GFF)), Myer ((MYR)), Alumina Ltd ((AWC)), Woodside ((WPL)) and DUET ((DUE)).

The bottom ten are MAp Group ((MAP)), Paladin ((PDN)), Intoll ((ITO)), BlueScope ((BSL)), Amcor ((AMC)), CSR ((CSR)), Sims Group ((SGM)), Westfield ((WDC)), JB Hi-Fi ((JBH)) and James Hardie ((JHX)).

BA-Merrill Lynch has been looking at the infrastructure and utilities sector. The analysts expect “very solid” six-month results. Assuming no more “debt events” (such as another European implosion for example), Merrills expects this sector to hold up well through any further market volatility, although it is not so clear as to whether this “defensive” sector can actually continue to outperform.

Those companies in the sector Merrills is looking to for “stand-out” results are AGL ((AGK)), Asciano ((AIO)), MAp Group, Transurban ((TCL)), Australian Infrastructure ((AIX)) and ConnectEast ((CEU)). The analysts particularly like MAP and AIO.

The analysts have these stocks trading at steep discounts to their discounted cash flow valuations, but note that price/earnings and other multiples do look high in comparison to other sectors. This may mean some resistance from the market, but Merrills considers them reasonable “in light of earnings security and likely growth”.

The broker warns, however, that AGL has outperformed the market by 6% since the beginning of June which limits its upside.

Morgan Stanley has considered another so-called “defensive” sector, being healthcare, but suggests regulatory risk undermines such defensiveness. MS has Ramsay Health Care ((RHC)) and Ansell ((ANN)) on Overweight ahead of reporting season believing the market may be too conservative in its earnings forecast consensus. ResMed ((RMD)) is the analysts' preferred growth exposure, but upside appears now to be capped, they suggest.

The new government initiative of pathology centre licensing is a negative for companies in that game, Morgan Stanley suggests. The analysts thus have an Underweight on Primary Health Care ((PRY)) and note that while less exposed, Healthscope ((HSP)) and Sonic Healthcare ((SHL)) remain “vulnerable”.

Morgan Stanley believes expectations for earnings growth for Cochlear ((COH)) are too high following a survey of the implant industry.

From defensive to offensive, or cyclical, Morgan Stanley has also run its ruler over the resources sector.

Companies which the analysts believe have upside risk to earnings results are BHP Billiton ((BHP)), Rio Tinto ((RIO)), OZ Minerals, PanAust ((PNA)), Equinox ((EQN)) and Newcrest ((NCM)). Companies with downside risk are Alumina, Iluka ((ILU)), Fortescue ((FMG)), Macarthur Coal ((MCC)) and Centennial Coal ((CEY)).

Morgan Stanley suggests management outlook from resource sector companies will tend to be on the conservative side given ongoing global uncertainty over European debt and Chinese slowing. The MRRT will no doubt crop up and the Chinese steel price will be seen as a lead indicator with iron ore spot prices now falling.

The analysts nevertheless expect improving share prices for mining companies over the course of the September quarter.

UBS has looked at the Real Estate Investment Trust sector. After considering upside and downside risk to results and guidance, the “always coming” office recovery, debt refinancing obligations, asset valuations, dividend payout ratios and the recovery of funds flow into REIT investment, UBS prefers Westfield and Goodman Group ((GMG)).

Moving on to FY11 guidance and analyst forecasts, UBS suggest margin expectations are a little optimistic. The analysts expect timing will be adjusted to suggest a longer than previously anticipated recovery, such that FY11 earnings forecasts across the market will need to come down by some 5%. UBS does not expect any “huge” downside.

On a sector distribution basis, UBS' strategists are Overweight the mining sector and the industrial cyclicals (media, selected consumer discretionary and selected mining services). They are Neutral on the banks but note banks will outperform in any market bounce.

At the stock level, the strategists' strongest growth/defensive ideas are ResMed, AGL and Crown ((CWN)).

While RBS is looking at cash realisation ratios to assess FY10 results, Deutsche Bank is using profit “run rates” to gauge the outlook for FY11 in the emerging companies (small industrials) sector.

A “run rate” is simply an extrapolation of a previous result. If company XYZ posted $100m profit in the first half of FY10, for example, then its run rate implies a full-year profit of $200m. But Deutsche is using forecast second half run rates to gauge expectations of first half FY11 earnings.

Run rates lose their value for certain specific sectors or stocks where seasonality is a major factor (Christmas for retail, for example). And for cyclicals in general, run rates are not taking into consideration troughs and peaks in cycles. But nevertheless, Deutsche notes most stocks in its coverage universe have run rates below current forecasts. Says Deutsche, “It appears that the market's expectation for earnings growth has improved over the calendar year to date, but remains slightly negative to FY11 earnings growth. If results prove to be closer to run rates than current forecasts, the analysts would expect downward pressure on the Small Industrials index.

Stocks with an FY11 run rate below current forecasts include Ardent Leisure ((AAD)), Crane Group ((CRG)), GWA International ((GWT)), Miclyn Express ((MIO)), Mermaid Marine ((MRM)), Realestate.com ((REA)), Salmat ((SLM)), Spotless ((SPT)), Swick Mining Services ((SWK)), Transpacific ((TPI)) and Wotif ((WTF)).

Stocks with run rates above consensus forecasts include Flight Centre ((FLT)), Bradken ((BKN)) and NRW Holdings ((NWH)).

Leaving off where we began, with RBS, the analysts have had a look at FY11 prospects for the construction and engineering sector.

The upshot is that the roll-off of government infrastructure stimulus coupled with delays to new resource projects in light of mining tax uncertainty have meant a risk to short-term performance. The sector does appear to be recovering, but the recovery is neither uniform nor linear, RBS suggests.

The analysts thus warn of downside risk to current FY11 forecasts in the sector but they nevertheless have a positive medium-term view, looking for performance on a three-year basis.

On that measure, the stocks RBS prefers in the sector are Downer EDI ((DOW)), Transfield ((TSE)), WorleyParsons ((WOR)), Monadelphous ((MND)), United Group, Leighton ((LEI)) and Boart Longyear ((BLY)).

FNArena will bring readers more broker previews as they come to hand.

article 3 months old

A Guide To The Australian Reporting Season

By Greg Peel

In the US, listed companies report their earnings results officially on a quarterly basis, with the great concentration being around the natural quarters of March, June, September and December. The June quarter season has just begun.

In Australia, reporting is required only on a half-year basis, although often companies will provide interim quarterly updates. The majority of Australian companies work off a June financial year, meaning December half results posted in February and full year-results posted in August. Increasingly, companies reporting in US dollars (many resource sector stocks for example) are working off a December financial year, meaning their August results are half-years and their February results full-years.

Then there are other companies, such as three of the big banks, which report on an “off” cycle to everyone else. But suffice to say, we are about to hit the major reporting season for the year. Next week and the week after will see the first handful of results, the second week of August sees a lot more, and thereafter comes the deluge. By September it's all over.

It is important for investors to appreciate that the market response to a result has nothing to do with whether or not a company posts a record profit, or a record loss. Responses will only be based on whether a company matched, beat or fell short of analyst forecasts. Every single day of the year, stock prices are building in earnings expectations. Thus an actual earnings result is only providing confirmation of market expectations, and affirmation of pricing, or otherwise. The inexperienced investor is often perplexed when BHP, for example, announces a record profit yet its shares fall on the day. The reason for the fall is usually that the market had expected an even bigger record profit, and thus is disappointed.

One must also not discount the “buy the rumour, sell the fact” effect. A stock may go for a run ahead of its results announcement on anticipation of an “upside surprise”, for example. If the result does surprise to the upside, the stock price can still fall as traders take profits on a successful trade.

Which brings us to the contradictory notion of “surprise”. Ahead of a results season, brokers will usually prepare lists of those stocks which their analysts believe may “surprise to the upside” or “surprise to the downside”. Your old English teacher would probably immediately ask “How can one expect something to surprise? Surely it cannot be a surprise if expected?” However, the butchered English simply reflects an analyst's view that perhaps market consensus is a bit conservative, for example, on a particular stock, and that it will find itself surprised by the result.

In the US, it's very easy to know immediately whether a result has “beaten the Street” or not given a very specific focus on earnings per share (EPS) and revenue forecasts and comparable results. In Australia, we tend to focus on the profit number. This is problematic, given profit results can be impacted by such things as tax changes, asset write-downs, depreciation charges and so forth. Analysts will often speak of a “messy” result, which is one which requires the report to be picked apart before the “real” performance can be gauged. It may not thus be immediately apparent whether the result is a “beat” or not. Sometimes an analyst needs a few hours to arrive at realistic opinion.

This also flows through to the important notion of result “quality” as opposed to “quantity”. The quantity of a result is simply the profit or earnings number which can be compared to last half and the same half last year, as well as previous management guidance and analyst forecasts. But let's say for example, that XYZ beat forecasts by a long margin, but did so because it closed and sold off several shops, slashed staff numbers, pared back inventory lines, brought forward tax losses, fully depreciated machinery – any such notion that suggests earnings were more about downsizing and less about growing revenues. Such a result lacks quality, because it paints a misleading picture of corporate growth.

Another example is banks which post solid trading profits from their proprietary desks in time of high market volatility. It's a good result in a quantitative sense, but not so in a qualitative sense given such volatility is unusual and such profits cannot be expected to always be repeated.

Quality or otherwise can take many forms.

Then having been hit with a series of numbers to interpret from the period past, the market will also take note of ongoing company guidance. Analysts do not only have FY10 forecasts running, they also have FY11 forecasts (and beyond) in their models. Guidance is just as important as the result.

For example, a company's accompanying statement to a result might be something like “We saw difficult trading conditions in FY10 but evidence in the past month or so suggests prices are firming and margins are increasing. We are forecasting an FY11 profit improvement of X”. Once again, the value of X is only important by comparison to analysts' FY11 forecasts, not as an absolute number. But if a company posts a weak result but sweetens it with better than expected guidance for the period ahead, that stock may still find buyers when selling might have been expected.

Note, however, that some companies may choose to provide only near term guidance, or, perhaps citing “uncertain global conditions”, provide none at all. There is no obligation, but the market does tend to assume by default that no news is bad news.

Just when you thought it was getting complicated, we must also consider the notion of “sandbagging”. 

Given it is always better for a company to beat market expectations than fall short, company managers will often understate their ongoing guidance, or even guidance updates they produce leading up to a result. This might strictly be called misleading disclosure, but such an accusation is hard to prove if management argues it was simply being “conservative”. By understating guidance, companies have a better chance of “surprising to the upside” when the true result is revealed. This is known as sandbagging.

Macquarie Group, for example, became known as a serial sandbagger back in its glory days before the GFC. Every half the bank would post conservative guidance and every result would blow that guidance away. But the market became so used to this game that analysts would simply take Macquarie's profit guidance and add 10-20% as a rule before declaring any “surprise”. So it helps not to become too transparent.

On the other side of the coin, some companies have been known to constantly miss guidance, leading to unexpected profit downgrades, which suggests they may be serial over-staters. As to whether this is deliberate or simply innocent evidence of rose-tinted glasses is by the by. Companies which do seem to overstate guidance are usually held in contempt and marked down for such “risk”.

So taking all of the above, the small investor must be wary of any knee-jerk reactions to profit results. BHP might report a record profit, but that does not necessarily ensure its share price will go up. Did the result beat analyst forecasts? Did the result beat company guidance? Was it a result of good quality? Was it a “messy” result? Was ongoing guidance positive? And was it more positive than FY11 forecasts suggest? All of these considerations must be made.

Often you'll see a stock price spike one way and then do an about-turn soon after, or even the next day. Stock analysts can tell you immediately whether a profit result was higher or lower than consensus, but before readjusting their views they will first tune into the conference calls held by management, pick through the details of the report, look at guidance, re-run their models and generally reformulate their outlooks. It may not be until the day after, or more, that an analyst decides, for example, to upgrade a stock to Buy.

So it's best for longer term investors to leave short term trading to the traders, and to wait for the dust to settle before considering portfolio adjustments.

Enjoy results season.

article 3 months old

Regulator To Standardise Broker Ratings

By Greg Peel

The Australian Securities and Investment Commission has been charged with the task of reassessing and consolidating investment advisory compliance rules in the wake of the Global Financial Crisis. A similar process is being carried out in all developed economies as a result of a G20 finance ministers' commitment to move toward more regulatory consistency across the globe.

Areas of focus include the problem of “too big to fail” in regard to financial institutions, the problem of opaque over-the-counter financial derivatives, and the issue of government guarantees of bank deposits. But also high on the agenda is a need for further protection for the retail investor.

Last year ASIC commissioned a survey of Australian retail investors, focusing particular attention to those hard hit by the GFC and its subsequent impact on financial markets. The burgeoning self-managed superannuation fund pool of investors was an obvious place to start.

ASIC has been receiving details of the survey over the first quarter 2010, and has this morning released a memorandum citing one particular complaint from investors that came up in the survey time and time again. Investors find stock broker recommendations confusing and misleading, and in many cases money had been lost by following recommendations closely.

“Many participants were incensed,” suggested ASIC spokesperson April Tromper, “that some stocks in their portfolios were still under 'Buy' ratings with brokers even as they lost up to 60% in value. Many claimed to be confused by the meaning of 'Buy', 'Outperform' and other typical ratings and how they differed from one another.

“Most of all it seemed,” said Tromper, “that investors could not understand why one broker can say 'Buy' when another says 'Sell'”.

This is hardly news to FNArena, which often fields email inquiries of exactly the same nature.

There are three major ratings scales used by brokers in Australia as well as across the world, being Buy, Hold or Sell; Outperform, Neutral or Underperform; and Overweight, Neutral or Underweight. In the last case, Equal-Weight can also be used in place of Neutral. In some cases, variations of combinations are used.

To further confuse the issue, some brokers stretch their ratings to a total of five, thus including mid-tier ratings such as Accumulate or Reduce.

In each case, it is the intention of the broker, or stock analyst, to convey the same meaning. Buy, Outperform or Overweight all mean investors should hold a greater proportion of the stock in question than its index weighting suggests. Sell, Underperform or Underweight means hold less, and Hold, Neutral or Equal-Weight means hold the equivalent index weighting.

However, the average small investor does not hold a portfolio equivalent to, for example, the ASX 200, upon which these ratings are based.

It becomes more confusing when the concept of target prices are introduced.

“Yes it's true that sometimes we can apply an Overweight rating to a stock even when the trading price has already exceeded our target price,” said one analyst from a major house I spoke to this morning, who for obvious reasons wished to remain anonymous. “Occasionally we even confuse our institutional clients”.

It would be a littler simpler if all brokers stuck to one popular formula – one in which a Buy rating was applied if the traded price was below the broker's target price, Sell if above, and Hold if on or near. This is the usual process, and indeed some brokers trigger ratings changes by a purely objective price formula rather than any form of subjective view.

But this still does not resolve the issue of how a retail investor – the numbers of which were very strong ahead of the GFC in proportional share holding terms – is meant to resolve the different ratings used by brokers, or the instances in which one broker says Buy and another Sell for the same stock at the same time.

The proposal put forward by ASIC this morning is to standardise all broker ratings for the benefit of the retail investment community. ASIC was not yet specific on which system would be enforced, although the early suggestion is that Buy, Hold, Sell is the simplest to appreciate.

Furthermore, stock brokers would be required to register their ratings changes with ASIC ahead of the release of research reports and provide justification for that change by means of a new compliance document currently being drawn up by the regulator.

In a move that will most unnerve the sell-side community, ASIC also intends to mark those ratings changes against prevailing trading prices and track broker performances. In the case, for example, of a broker maintaining a Buy rating on a stock that is continuing to lose value, ASIC intends to take some form of punitive action.

“The system will be akin to the 'speeding ticket' system in use for listed companies,” explained Tromper, “in which companies are obliged to justify unusual stock prices movements and can be fined for breaches of disclosure regulations. Brokers unable to justify their stock ratings will also be subject to potential fines and possible loss of trading licence”.

ASIC further intends to issue “please explain” notices to brokers whose ratings on a particular stock do not match consensus, such as a broker who publishes a Sell rating when the great majority of peers is recommending Buy.

“It is a lack of consensus that confuses many retail investors,” Tromper suggests, “and ASIC believes it is in the interest of the investment community to increase compliance among the broking industry”.

The response to this memorandum from FNArena's contact at the major broking house cannot be printed, but suffice to say ASIC has a fight on its hands if it is to see these new rules passed into legislation. However, we are already aware that Australian banks are currently in fear of upsetting the government in an election year lest they incur the wrath of those campaigning. It would be popular with the electorate if policies were put forward for much greater bank regulation.

To that end, the broking community might also be best served by ceding to ASIC's wishes.

article 3 months old

Flight Centre Readies For Take Off

By Andrew Nelson

Comments from Flight Centre's ((FLT)) AGM underline that the company's Australian business is improving more quickly than most had been expecting. Volumes have risen to record levels, with plenty of help coming from price discounting by the airlines and an overall improvement in consumer confidence.

Yet while things are looking fine for the future, management decided to maintain its FY10 guidance, with memories of a turbulent FY09 far from faded. Brokers, however, haven't maintained theirs.

The Australian broker community was a little more enthusiastic in their outlook for Flight Centre than management and there seem to be quite a few reasons why. One of the major positive points coming out of the AGM reaction was recognition of the performance of the group's Australian business, which after all, generates 73% of the company's pre tax earnings.

With airline yields looking like they are bottoming, and signs of increased outbound travel demand emerging, plus the flow on benefits from a stronger AUD and relatively low airfares, analysts from Deutsche Bank predict the Australian division will be back at FY08 levels of profitability sooner than expected.

RBS Morgans also believes the travel industry has now stabilised and with it seeing travel demand as being highly leveraged to the economic recovery and improving consumer and business confidence In the past, points out the broker, tourism numbers have rebounded strongly after travel shocks and economic downturns.

This improvement in travel demand is also being mentioned by Credit Suisse, who notes that some of the company's competing travel agents, like Qantas and Virgin, have already released traffic and capacity statistics confirming the signs of recovery.

However, the team from Deutsche Bank notes that while the Australian division is recovering more quickly than other markets, the loss-making Liberty business in the US is also tracking ahead of budget, with expectations for a break even result in FY10.

And when Liberty finally does become profitable, analysts from UBS think there will be significant EPS and valuation upside as a result. The broker is of the opinion that the worst is now behind Liberty, noting improving traffic numbers and a reduced cost base after restructuring.

RBS Morgans goes on to note that not only is the company's network ready to capitalise on improving market conditions, the strong balance sheet the company is now working with also leaves it well positioned to take advantage of any opportunities that may arise.

The broker also points out that the first quarter is usually the company's weakest quarter, with earnings normally seasonally skewed to the second half . Yet Q1 before tax net profit of $34m was well ahead of expectations, leaving the broker to think the full-year guidance of $125m-135m, which represents 25-35% growth, is actually very conservative.

Morgans notes that if you were to extrapolate out the first quarter numbers, Flight Centre will easily fly over the top of the high end of guidance. Expect the guidance to be upgraded with the interim result in February, says the broker. Credit Suisse agrees, believing that momentum over the remainder of this half will continue to provide a strong base that will probably see the company beat guidance.

Of the four brokers mentioned, three have a Buy call on the stock. Only Credit Suisse has a hold call, and while the broker has lifted its forecasts to $5m above the top end of Flight Centre's guidance range post the AGM, it still believes that a total rate of return of 18% over the next 12  months, while certainly positive, only warrants a Neutral call given the stock is trading on an FY10 PER of 20.1x.

Deutsche is also predicting a $140m profit and this sees it lift its FY10-11 EPS by 3.6% and 13.4%, while its price target jumps to $19.80 per share (from $15). UBS has upgraded its FY10-12 EPS forecasts by 4%, 6% and 7%, leaving it 19% above guidance, while its price target goes from $16.20 to $19.00.

RBS has upgraded its FY10-11 net profit forecasts by 17.8% and 21.9% and now sits at $161.1m for its FY profit result. This lifts its target price and valuation to $20.00 (was $16.31) and the broker otherwise believes the stock is undervalued on an FY11 PER of 13x.

The FNArena Sentiment indicator is giving a reading of 0.3 on Flight Centre, with the three Buys and one Neutral mentioned above offset by a Sell from JP Morgan and a Neutral from Macquarie (revised price target of $17.75). Note that JP Morgan has yet to update its thoughts post the AGM.

In market action today shares are down 15c to $16.86 versus a 12-month trading range of $3.39 to $17.47.

article 3 months old

Oz Retail Sales Set To Drop Sharply

By Greg Peel

It's not exactly rocket science, but the numbers are worth analysing. Australia's monthly retail sales figures have been extremely volatile on a historical basis of late, and this can be quite simply attributed to government fiscal stimulus. While the government has suggested another hand-out is not out of the question if deemed necessary, it won't be happening immediately and not at all if the general market recovery is sustained.

The following graph tells the story:


In December last year, the government handed out a total of $8.7bn in stimulus cheques. This was immediately reflected in a big jump in retail sales as one might expect, exactly as the government had hoped for. Indeed, the government attempted to subtely suggest it would be un-Australian to hang on to the money, even if it meant a big splurge on the pokies. The specific group of recipients responded in kind, although, as the Westpac economists note, they mostly held off to January to take advantage of post-Christmas bargains.

Hence a big spike in sales in January, followed by an offsetting big fall in February once the money had been spent.

February also represented what we now hope to be the GFC's darkest hour, when there seemed nothing would halt a crumbling stock market and nothing could prevent Australia from sliding into recession. January might have seen a free flutter, but by February it was all about battening down the spending hatches.

Thus the government went in for round two - this time for $12.8bn and for a much wider group of Australians. Again the prime minister and treasurer adopted JFK-esque rhetoric (ask not what your country can do for you), encouraging recipients to get out there and do their bit. Retailers did their bit as well, given suddenly every fridge on special was reduced to $899, and every trip to the mechanic strangely came in with about a $900 quote.

Westpac calculates this second round of hand-outs saw $4.3bn enter the market in March, pulling us back from the brink, with another $6bn spent in April to post a positive retail sales result once more. That leaves $2.5bn to be spent, which Westpac suggests will trickle into the market over May, June and July. It is curious that the economists are making no allowance for cheques that were used to pay down debt or simply saved.

The implication is that May retail sales will show a very sharp drop off, not dissimilar to the February result, with June also showing to the negative, as the above graph suggests. Nevertheless, the economists admit that prevailing sentiment clouds the issue.

Or more correctly, they suggest the two stimulus payments make it hard to extract the true underlying trend in retail sales and thus make accurate forecasts. One must consider that February can now be considered the darkest point before the dawn, and that "green shoots", culminating in a positive first quarter GDP, have sent consumer confidence soaring by comparison. Lower interest rates and petrol prices have also assisted, although the latter is under threat again.

So just how will Australians respond? Take the "no recession" line as a cue to stampede Hardly Normal again, or stick to the austerity plan in the face of potential unemployment? It's a tough one.

Either way, however, Westpac feels the lack of further government stimulus must make a big enough difference to send retail sales growth back into the red, leading to a more subdued May-July period.